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You might have read that the U.S. investment markets are jittery on the news that Japan has experienced two consecutive quarters of economic decline—the official definition of a recession. But if you turn the news around, it offers us a reminder that, however much we complain about slow-growth recovery from 2008, Americans are actually part of one of the most robust economies in the world.

The statistics tell an interesting story. The U.S. economy is growing at a rate of about 2.95% for the year, which is (as the complainers correctly point out) slightly below its long-term pace. But this doesn’t look so bad compared to the 2.16% growth average for the G7 nations in aggregate, and our growth numbers are well ahead of the European Union, whose economies are expanding at an anemic 1.28% rate this year.

Look deeper and our story looks even better. The current recession is Japan’s fourth in six years, despite long-term stimulus efforts that make the Fed’s QE program look like a purchase at the candy store. Europe is rumored to be teetering on the edge of recession, which would be its second since the 2008 meltdown. The published GDP figures coming out of China (which are very unreliable due to heavy government editing) could drop to about half the long-term rate this year, and Brazil entered recession territory last summer.

But what about the 5.8% unemployment rate in the U.S.? That’s better than the 10% rate at the end of 2008, but it’s not good—right? Compared with the rest of the world, America’s jobs picture looks downright rosy. The list, below, shows that only 13 countries have lower jobless rates than the American economy, and some of those (Malaysia, Russia, Saudi Arabia) may be giving out numbers that their leaders want to hear. Yes, it would be nice if the long, sustained GDP growth we’ve enjoyed these last six years were faster, and we all hope that the unemployment rate continues dropping. But compared with just about everywhere else, life in the U.S.—on the economic front, at least—is pretty good

If you would like to discuss your current portfolio/asset allocation or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Correlation coefficients are one of the most complicated areas of the asset management world, but the idea behind them is pretty simple–or, at least, most of us thought it was until the 2008-2009 meltdown. The basic idea is that you study the price movements of, say, the stocks of large companies (represented by the S&P 500), and then look at the price movements of, say, stocks in the NAREIT (real estate) index. You find that, on average, they tend to march to different drummers; when one goes up, the other goes up less, or it may go down. When the other goes down, the first asset may go up or stay the same. They have, in the parlance of experts, a low correlation.

These correlations between various flavors of stocks and real estate, commodities, bonds and other assets are expressed mathematically, and are one of the factors that professional investment advisors take into account when they build portfolios. Whenever one kind of asset is going down, ideally you want something else in the portfolio to be going up, responding to different influences.

But all of these carefully-crafted models and all the higher mathematics went seriously awry during the 2008-2009 downturn, when every risk asset–from commodities to real estate to stocks–went down in concert as if the correlation coefficients had suddenly decided to converge at exactly the wrong time. How could this happen?

At a recent investment conference, the outlines of a possible explanation began to emerge. It was noted that all of those risk assets had one thing in common: they were financed or owned by the same small number of investment banking and brokerage institutions. When Lehman Brothers went bankrupt and Bear Stearns was essentially folded into J.P. Morgan, when Citigroup and Merrill Lynch and Goldman Sachs suddenly had to rebuild their balance sheets, they all needed to sell assets to raise money. The result: the world’s largest owners of risk assets were all desperate sellers at the same time. Suddenly, all those assets, no matter how different their underlying economics, were in the same boat: they had to be sold so that companies could meet their net capital requirements and stave off bankruptcy.

And, of course, this caused those assets to have something else in common: they were dropping in value so fast that the average investor was scared out of his wits. Instead of a run on the banks, as we saw in the 1930s, there was a run on the markets, fueled by the same kind of panic: will I be able to get my money out before it disappears?

This explains how the normal historical correlations failed to protect even the best-diversified portfolios. The discussion then turned to: is there anything we can do about this going forward? The solutions under discussion ranged from buying expensive hedges (which, of course, become dramatically more expensive during a panic), to selling into the teeth of the storm (and locking in significant losses), and, in general, the answers weren’t very satisfying. The consensus was twofold: first, these kinds of panics don’t happen very often. Interestingly, the mathematics of modern portfolio theory suggest that a 2008-like downturn should happen every 65-80 years, and that happens to be just about how long it was between the Great Depression and the Great Recession.

Second: these panics seem, in retrospect, to be great times to buy risk-based securities. When others are selling in a panic, you can almost name your price, and to the extent that you don’t believe that civilization is coming to an end, you trust that sooner or later the stocks you bought cheaply will, when the panic subsides, rediscover their true value. The trouble, as one advisor put it, is: how are you going to tell your frightened clients, in the height of a storm, that this is a great time to put more money into the market? Is anybody going to listen to that advice when the largest global investing organizations are trying to unload those same assets at any price they can get?

The bottom line here is that professional investors are finally getting a handle on why well-diversified portfolios didn’t protect against the 2008 downturn. But the fact remains that the people who can control their panic seem to be the only ones who will be protected the next time there’s a panic run for the exits. Until we invent a cure for the human tendency to flee with the herd, investment portfolios are likely to go down the next time we experience a serious market downturn. Let’s hope we’ll have to wait 60-80 years.

If you would like to discuss your current portfolio/asset allocation or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

The economic news that everybody is talking about lately is the sudden unexpected drop in oil prices. One type of oil, West Texas Intermediate crude, has fallen from over $140 a barrel in the summer of 2008, and $115 a barrel as recently as June, down to $91, and there is no sign that the decline will stop there.

The price drop seems to be the result of a perfect storm of factors, both on the supply and demand side. On the supply side, U.S. production has risen to the point where only Saudi Arabia extracts more oil from its soil. In the recent past, America’s additional production was offset by sharp declines in production caused by the civil war in Libya, plus production declines in Iraq, Nigeria and the Sudan. Those countries are now back in business, adding the production equivalent of 3 million barrels a day, a significant fraction of the 75 million barrels a day of global production.

On the demand side, meanwhile, China’s growth has fallen by half, European economies are weakening, and people everywhere are driving more fuel-efficient cars and living in more energy-efficient homes.

As always, a major shift in global economics is producing some winners and losers. American consumers are among the most prominent winners, since they consume more oil and gas per capita than the citizens of any other country. The stiff drop in oil prices this year has resulted in U.S. gasoline prices falling 26¢ to an average of $2.88 per gallon, down from $3.14 a month ago. That’s equivalent to a $40-billion tax cut that will benefit various the transportation sector, energy-dependent manufacturers and, of course, the handful of Americans who drive automobiles.

Lower energy prices are also a boon for countries that import a significant amount of crude, including India, which brings in roughly 85% of its oil, and Japan, which is importing oil again now that its nuclear reactor industry is on hiatus.

Losers? You can expect the major oil companies to report lower profits in the months ahead, and the Russian economy which is heavily dependent on energy exports and already feeling the impact of an impending recession, is being crushed. Surprisingly, some believe the biggest loser is Iran, whose social program spending and high costs of extraction imply a break-even well above today’s prices, estimated as high as $130 a barrel.

As mentioned earlier, oil prices could—and probably will—drop further. But don’t believe the predictions that have popped up in the newspapers and on the financial TV stations of a new era of oil abundance. Oil prices almost certainly won’t fall to pre-2007 prices, which can be seen on the accompanying chart.

Why? According to the International Energy Agency, the capital cost of producing a unit of energy—that is, the cost of finding oil and gas, drilling for it (and hiring the people who will do these things, who are some of the best-paid workers in the world), moving it from the well to the refinery and refining it have doubled since 2000, and the rise in these costs increases yearly. If oil prices drop much further, shale oil producers in North Dakota and Texas will find it unprofitable to keep drilling.

Another floor under prices is the OPEC cartel, which together supplies about 40 percent of the world’s oil. A Bloomberg report noted that OPEC nations—particularly Saudi Arabia—have been surprisingly relaxed about the supply/demand shifts. The cartel nations pumped 30.97 million barrels a day in October, exceeding their collective output target of 30 million barrels for a fifth straight month. However, if oil prices were to dip closer to $80 a barrel, the cartel could well turn down the spigot and change the equation back in favor of higher prices. An OPEC meeting scheduled on Thanksgiving Day should have market moving implications for oil prices.

What should you do about all this? Enjoy it! When was the last time you saw prices fall dramatically on an item that you use every day, and that you could hardly function without? Chances are you’ve been whacked by higher gas prices a few times in your life; this is your chance to enjoy a different dynamic—while it lasts.

Oh… And don’t spend a lot of time worrying about the big oil companies. Somehow they’ll manage to muddle through and stay profitable long enough to reap big gains the next time prices jump in the opposite direction.

If you would like to discuss any financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.

Self-employment is an important career choice for many people, and it is an option elected by many seniors and baby boomers. But with this choice comes the need to provide your own health insurance, which can be a formidable expense. And, thanks to the Affordable Care Act, a necessary one starting in 2014. If you are self employed and are seeking health care coverage, here are your major options.

Piggyback on a Partner’s Plan

If you have a spouse or partner who is or can be enrolled in an employer-sponsored plan, joining this plan is usually the simplest and least expensive way to maintain coverage. Nearly all employer-based plans offer coverage to spouses and children, and many provide coverage to domestic partners as well.

Continue Coverage Through COBRA

If you formerly were employed by an organization that employed 20 or more people and made a group health plan available to employees, you may be able to obtain medical coverage through the federal Consolidated Omnibus Budget Reconciliation Act, known as COBRA. COBRA requires employers to make available to departing employees the option of continuing membership in an employer-sponsored group medical plan at the employee’s expense. You can continue your health insurance under COBRA for yourself and your dependents for 18 months, during which time you can search for the best option as a self-employed person.

Enroll in a High-Deductible Plan & HSA

High-deductible plans (HDPs), as their name suggests, involve a high deductible or threshold below which you must pay all costs. For 2014, minimum deductibles are $1,250 for an individual and $2,500 for a family. In essence, a high-deductible policy provides coverage for catastrophic situations but does not generally provide for regular doctor visits and routine care. Such plans can involve complex cost-sharing arrangements in which certain procedures or visits are covered only in part. When considering this option, factor in not only monthly premiums but also the costs of partial out-of-pocket payment for different procedures.

Combining an HDP with a tax-free health savings account (HSA) can also save you in taxes. You deposit pre-tax dollars into your HSA, and use that money to pay medical expenses that aren’t reimbursed by your health insurance.

Enroll in a Group Plan Through a Professional Association

You may be able to save money by enrolling in a group plan sponsored by a professional organization. Check with any affiliations you may have (for example, the American Medical Association or a state bar association for attorneys) to see if they offer group rates for members. As with any plan, you’ll need to look at not only costs but also deductibles, co-pays, and how well the coverage meets your needs.

Enroll on Your Own Through a Health Insurance Marketplace

Many states now have health insurance marketplaces. The federal marketplace has an up-to-date list and provides insurance referrals to consumers whose states do not have their own websites.

Enroll in an HMO or PPO Plan

For many self-employed individuals, their best option will be to enroll directly in a health maintenance organization (HMO) or preferred provider organization (PPO). In general, HMOs tend to be more expensive than PPOs, but plan costs vary considerably with coverage options, so shop around. Also keep in mind that individual enrollment in a plan is likely to be expensive, often $500 or more per month for individual coverage, and that costs are generally not tax deductible.

When shopping for the right plan, make sure to do your homework. Compare premiums, coverage, deductibles, and copays. Also keep in mind that after you turn 65, you may be eligible for Medicare benefits, even if you remain self employed.

If you’d like to know more about health insurance when self-employed, or if you want to discuss other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.

One of the oddest things about tax law is the fact that often the rules and regulations are decided by the many court cases that are brought by taxpayers who didn’t follow the rulebook. This happened once again in a recent tax court case, where the Tax Court decided that people can only do one IRA rollover in any one-year period, no matter how many other IRA accounts they happen to have. Never mind that the decision directly contradicted the IRS’s own guidance in its Publication 590 and a number of private-letter rulings issued by the IRS.

Since the so-called Bobrow decision (which may be appealed), a common way to move money from one IRA account to another now has to be monitored closely. The ruling affects situations where an IRA owner takes a distribution from an IRA and then rolls those same funds over to another IRA within 60 days. So long as the same amount of money is put back into an IRA account within that time period, no taxes have to be paid on the distribution of funds (and no 10% additional penalty, if the IRA owner is under age 59 1/2). But now you WILL have to pay taxes–and the penalty, if applicable–if you try to do this again with the same or other IRAs during the same 365-day period.

Fortunately, this rule doesn’t apply to direct transfers, which is the way most professionals prefer to move money between IRA accounts. A direct transfer is exactly what it sounds like: the trustee of one IRA moves the money directly from that account into the hands of a trustee for another IRA account; that is, the money flows directly from one account to the other without the taxpayer ever touching it or putting it into his or her own checking account. Under current rules, even with the Bobrow decision, these kinds of transfers can be done all day long, all year long.

It has always been good advice to use only direct transfers to move IRA funds from one IRA to another. Now it’s even more so.

Incidentally, this once-per-year IRA rollover rule doesn’t apply to rollovers from an IRA to a Roth IRA (commonly known as a Roth IRA conversion). But most advisors prefer to handle those on a trustee-to-trustee basis anyway, to avoid confusion and potential problems with the 60-day rule. Mistakes on transfers can be costly from a tax standpoint, and the way things stand, they can’t be fixed after the fact–unless you decide to take the case to court and hope to reverse the current rule of law, which is far more costly still.

If you’d like to know more about rollover rules or if you want to discuss other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.

Disability insurance addresses lost wages that stem from an inability to work. Long-term care insurance, in contrast, addresses expenses associated with medical care provided to you in your home, a nursing home, a rehabilitation center, or an assisted living facility.

Disability insurance policies may address either short-term or long-term needs for income. Short-term disability policies provide coverage on a temporary basis, usually up to several months, while you recover from an accident or illness. Long-term disability insurance provides benefits when a disability is of a more permanent nature. Most long-term disability policies will cover you throughout your working years, usually until you reach age 65. Policies vary considerably in terms of the cost of premiums, the percentage of your prior salary paid out as a benefit and the definition of what constitutes a disability.

Long-term care insurance is designed to help cover costs of health care services provided to you in your home, a nursing home, a rehabilitation center, or an assisted living facility. Many long-term care insurance policies provide benefits when you require assistance with activities of daily living such as bathing, dressing, and feeding yourself. Loss of wages typically is not an issue with this type of coverage.

Long-term care insurance can be purchased at any time in your life. However, premiums tend to rise considerably with age and applicants can be turned down due to pre-existing medical conditions. Although individuals of any age may receive benefits from a long-term care insurance policy, these policies typically are intended to help finance the medical costs of the aged.

Why do many financial experts recommend their clients purchase both disability and long-term care insurance?

• According to the Social Security Administration, a 20-something worker today has a 30% chance of becoming seriously disabled before reaching retirement.1
• The average daily charge for a semi-private room at a nursing home is $207. The average monthly charge for care in an assisted living facility is $3,450. 2

If you’d like to know more about disability and long-term care insurance, or if you want to discuss other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.

Year-end planning will be more challenging than normal this year. Unless Congress acts, a number of popular deductions and credits expired at the end of 2013 and won’t be available for 2014. Deductions not available this year include, for example, the election to deduct state and local sales taxes instead of state and local income taxes, the above-the-line deductions for tuition and educator expenses, generous bonus depreciation and expensing allowances for business property, and qualified charitable distributions that allow taxpayers over age 70½ to make tax-free transfers from their IRAs directly to charities.

Of course, Congress could revive some or all the favorable tax rules that have expired as they have done in the past. However, which actions Congress will take remains to be seen and may well depend on the outcome of the elections.

Before we get to specific suggestions, here are two important considerations to keep in mind.

Remember that effective tax planning requires considering both this year and next year—at least. Without a multi-year outlook, you can’t be sure maneuvers intended to save taxes on your 2014 return won’t backfire and cost additional money in the future.

Be on the alert for the Alternative Minimum Tax (AMT) in all of your planning, because what may be a great move for regular tax purposes may create or increase an AMT problem. There’s a good chance you’ll be hit with AMT if you deduct a significant amount of state and local taxes, claim multiple dependents, exercised incentive stock options, or recognized a large capital gain this year.

Here are a few tax-saving ideas to get you started. As always, you can call on us to help you sort through the options and implement strategies that make sense for you.

Year-end Moves for Your Business

Employ Your Child. If you are self-employed, don’t miss one last opportunity to employ your child before the end of the year. Doing so has tax benefits in that it shifts income (which is not subject to the Kiddie tax) from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. There can also be payroll tax savings since wages paid by sole proprietors to their children under age 18 are exempt from social security and unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them contribute to an IRA. The compounded growth in an IRA started at a young age can be a significant jump start to the child’s retirement savings.

Remember a couple of things when employing your child. First, the wages paid must be reasonable given the child’s age and work skills. Second, if the child is in college, or is entering soon, having too much earned income can have a detrimental impact on the student’s need-based financial aid eligibility.

Check Your Partnership and S Corporation Stock Basis. If you own an interest in a partnership or S corporation, your ability to deduct any losses it passes through is limited to your basis. Although any unused loss can be carried forward indefinitely, the time value of money diminishes the usefulness of these suspended deductions. Thus, if you expect the partnership or S corporation to generate a loss this year and you lack sufficient basis to claim a full deduction, you may want to make a capital contribution (or in the case of an S corporation, loan it additional funds) before year end.

Avoid the Hobby Loss Rules. A lot of businesses that are just starting out or have hit a bump in the road may wind up showing a loss for the year. The last thing the business owner wants in this situation is for the IRS to come knocking on the door arguing the business’s losses aren’t deductible because the activity is just a hobby for the owner. Surprisingly, the IRS has been fairly successful recently in making this argument when it takes taxpayers to court. Thus, if your business is expecting a loss this year, we should talk before year-end to make sure we do everything possible to maximize the tax benefit of the loss and minimize its economic impact.

Managing Your Adjusted Gross Income (AGI)

Many tax deductions and credits are subject to AGI-based phase-out, which means only taxpayers with AGI below certain levels benefit. [AGI is the amount at the bottom of page 1 of your Form 1040—basically your gross income less certain adjustments (i.e., deductions), but before itemized deductions and the deduction for personal exemptions.] Unfortunately, however, the applicable AGI amounts differ depending on the particular deduction or credit. The following table shows a few of the more common deductions and credits and the applicable AGI phase-out ranges for 2014:

Deduction or Credit

Adjusted Gross Income Phase-out Range

Joint Return

Single/Head of Household (HOH)

Married Filing Separate

American Opportunity Tax Credit

$160,000–$180,000

$80,000–$90,000

No credit

Child Tax Credit

Begins at $110,000

Begins at $75,000

Begins at $55,000

Itemized Deduction and Personal Exemption Reduction

Begins at $305,050

Begins at $254,200 Single, $279,650 HOH

Begins at $152,525

Lifetime Learning Credit

$108,000–$128,000

$54,000–$64,000

No credit

Passive Rental Loss ($25,000) Exception

$100,000–$150,000

$100,000–$150,000

No exception unless spouses live apart

Student Loan Interest Deduction

$130,000–$160,000

$65,000–$80,000

No deduction

Managing your AGI can also help you avoid (or reduce the impact of) the 3.8% net investment income tax that potentially applies if your AGI exceeds $250,000 for joint returns, $200,000 for unmarried taxpayers.

Managing your AGI can be somewhat difficult, since it is not affected by many deductions you can control, such as deductions for charitable contributions and real estate and state income taxes. However, you can effectively reduce your AGI by increasing “above-the-line” deductions, such as those for IRA or self-employed retirement plan contributions. For sales of property, consider an installment sale that shifts part of the gain to later years when the installment payments are received or use a like-kind exchange that defers the gain until the exchanged property is sold. If you own a cash-basis business, delay billings so payments aren’t received until 2015 or accelerate paying of certain expenses, such as office supplies and repairs and maintenance, to 2014. Of course, before deferring income, you must assess the risk of doing so. If you’re considering a gift to a person in a lower capital gains bracket or charity (see below), giving appreciated securities avoids recognition of the capital gains and thereby lowers AGI.

See also It May Pay to Wait until the End of the Year to Take Your IRA Required Minimum Distributions below for a possible extension of a tax provision that expired in 2013.

Charitable Giving

You might want to consider two charitable giving strategies that can help boost your 2014 charitable contributions deduction. First, donations charged to a credit card are deductible in the year charged, not when payment is made on the card. Thus, charging donations to your credit card before year-end enables you to increase your 2014 charitable donations deduction even if you’re temporarily short on cash. As mentioned above, donating appreciated securities gets you a charitable contribution deduction at fair market value without having to recognize the capital gain income.

Another charitable giving approach you might want to consider is the donor-advised fund. These funds essentially allow you to obtain an immediate tax deduction for setting aside funds that will be used for future charitable donations. With these arrangements, which are available through a number of major mutual fund companies, custodians, universities and community foundations, you contribute money or securities to an account established in your name. You then choose among investment options and, on your own timetable, recommend grants to charities of your choice. The minimum for establishing a donor-advised fund is often $10,000 or more, but these funds can make sense if you want to obtain a tax deduction now but take your time in determining or making payments to the recipient charity or charities. These funds can also be a way to establish a family philanthropic legacy without incurring the administrative costs and headaches of establishing a private foundation.

Year-end Investment Moves

Harvest Capital Losses. There are a number of year-end investment strategies that can help lower your tax bill. Perhaps the simplest is reviewing your securities portfolio for any losers that can be sold before year-end to offset gains you have already recognized this year or to get you to the $3,000 maximum ($1,500 married filing separate) net capital loss that’s deductible each year. Don’t worry if your net loss for the year exceeds $3,000, because the excess carries over indefinitely to future tax years. Be mindful, however, of the wash sale rule when you jettison losers—your loss is deferred if you purchase substantially identical stock or securities within the period beginning 30 days before and ending 30 days after the sale date. However, never let the tax “tail” wag the investment “dog”; the sale must make investment sense first, tax sense second (always keep in mind long term investment objectives over short-term tax objectives).

Consider a Bond Swap. Bond swaps can be an effective means of generating capital losses. With a bond swap, you start with a bond or bond fund that has decreased in value, which might be due to an increase in interest rates or a lowering of the issuer’s creditworthiness. You sell the bond or fund shares and immediately reinvest in a similar (but not substantially identical) bond or bond fund. The end result is that you recognize a taxable loss and still hold a bond or shares in a bond fund that pays you similar or more interest than before.

Secure a Deduction for Nearly Worthless Securities. If you own any securities that are all but worthless with little hope of recovery, you might consider selling them before the end of the year so you can capitalize on the loss this year. You can deduct a loss on worthless securities only if you can prove the investment is completely worthless. Thus, a deduction is not available, as long as you own the security and it has any value at all. Total worthlessness can be very difficult to establish with any certainty. To avoid the issue, it may be easier just to sell the security if it has any marketable value. As long as the sale is not to a family member, this allows you to claim a loss for the difference between your tax basis and the proceeds (subject to the normal rules capital loss and wash sale rules previously discussed).

Consider a Roth IRA Conversion. If your highest tax bracket is lower than normal this year, consider a Roth IRA conversion of some of your traditional IRA funds. You may also have some “room” in your current tax bracket that might be able to absorb a small Roth IRA conversion without pushing you into a higher tax bracket. Roth conversions affect AGI, so it’s best done with professional help to understand all the ramifications of the conversion.

Year-end Moves for Seniors Age 701/2 Plus

Take Your Required Retirement Distributions. The tax laws generally require individuals with retirement accounts to take withdrawals based on the size of their account and their age beginning with the year they reach age 701/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. If you turned age 701/2 in 2014, you can delay your 2014 required distribution to 2015 if you choose. But, waiting until 2015 will result in two distributions in 2015—the amount required for 2014 plus the amount required for 2015. While deferring income is normally a sound tax strategy, here it results in bunching income into 2015. Thus, think twice before delaying your 2014 distribution to 2015—bunching income into 2015 might throw you into a higher tax bracket or bring you above the modified AGI level that will trigger the 3.8% net investment income tax. However, it could be beneficial to take both distributions in 2015 if you expect to be in a substantially lower bracket in 2015. For example, you may wish to delay the 2014 required distribution until 2015 if you plan to retire late this year or early next year, have significant nonrecurring income this year, or expect a business loss next year.

It May Pay to Wait until the End of the Year to Take Your Required Minimum Distributions. If you plan on making additional charitable contributions this year and you have not yet received your 2014 required distribution from your IRA, you might want to wait until the very end of the year to do both. It is possible that the Congress will bring back the popular Qualified Charitable Distributions (QCDs) that expired at the end of 2013. If so, IRA owners and beneficiaries who have reached age 70½ will be able to make cash donations totaling up to $100,000 to IRS-approved public charities directly out of their IRAs. QCDs are federal-income-tax-free to you and they can qualify as part of your required distribution, but you get no itemized charitable write-off on your Form 1040. That’s okay because the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without having to itemize your deductions or worry about restrictions that can reduce or delay itemized charitable write-offs. However, to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity. Once you receive the cash, the distribution is not a QCD and won’t qualify for this tax break.

Ideas for the Office

Maximize Contributions to 401(k) Plans. If you have a 401(k) plan at work, it’s just about time to tell your company how much you want to set aside on a tax-free basis for next year. Contribute as much as you can stand, especially if your employer makes matching contributions. You give up “free money” when you fail to participate to the max for the match.

Take Advantage of Flexible Spending Accounts (FSAs). If your company has a healthcare and/or dependent care FSA, before year-end you must specify how much of your 2015 salary to convert into tax-free contributions to the plan. You can then take tax-free withdrawals next year to reimburse yourself for out-of-pocket medical and dental expenses and qualifying dependent care costs. Watch out, though, FSAs are “use-it-or-lose-it” accounts—you don’t want to set aside more than what you’ll likely have in qualifying expenses for the year.

If you currently have a healthcare FSA, make sure you drain it by incurring eligible expenses before the deadline for this year. Otherwise, you’ll lose the remaining balance. It’s not that hard to drum some things up: new glasses or contacts, dental work you’ve been putting off, or prescriptions that can be filled early.

Adjust Your Federal Income Tax Withholding. If it looks like you are going to owe income taxes for 2014, consider bumping up the federal income taxes withheld from your paychecks now through the end of the year. When you file your return, you will still have to pay any taxes due less the amount paid in. However, as long as your total tax payments (estimated payments plus withholding) equal at least 90% of your 2014 liability or, if smaller, 100% of your 2013 liability (110% if your 2013 adjusted gross income exceeded $150,000; $75,000 for married individuals who filed separate returns), penalties will be minimized, if not eliminated.

Don’t Overlook Estate Planning

For 2014, the unified federal gift and estate tax exemption is a historically generous $5.34 million, and the federal estate tax rate is a historically reasonable 40%. Even if you already have an estate plan, it may need updating to reflect the current estate and gift tax rules. Also, you may need to make some changes for reasons that have nothing to do with taxes.

Conclusion

Through careful planning, it’s possible your 2014 tax liability can still be significantly reduced, but don’t delay. The longer you wait, the less likely it is that you’ll be able to achieve a meaningful reduction. The ideas discussed in this article are a good way to get you started with year-end planning, but they’re no substitute for personalized professional assistance. Please don’t hesitate to call us with questions or for additional strategies on reducing your tax bill. We’d be glad to set up a tax or financial planning meeting by calling (734) 447-5305 or assist you in any other way that we can. You can always visit our web site at http://www.ydfs.com